Crude Observations

May the Fourth Be With You

The force is strong in this week’s blog. So, Someone is forecasting $300 oil. Aside from how ridiculous and reckless that is, let me first say, it comes from a pretty successful hedge fund investor and is backed by some thoughtful analysis. And, aside from being barking mad, the point of the call is that without significant investment in new fields and projects, there is a very real possibility that rising demand and  decline rates crush OPEC spare capacity and the fantasy of tight oil as a swing producer and we find ourselves in the mother of all supply crunches. Which would lead to much higher prices.


This thought of course let me drift away into fantasy land where $300 oil is not only a possibility but something that has in fact come to pass. As luck would have it, while I was thinking about this I was idling in my gas-guzzler of an SUV while a couple of very respectable gentlemen sampled some soon to be legal cannabis next to my open window. Ironically, this must have been very potent stuff as I experienced a sudden and acute case of reefer madness, complete with KFC cravings and visions. Visions of the future. Hmm, OK, maybe there was some peyote in the pot as well. At any rate, this vision of the future was very real and it contained a news article and that news article is reproduced below…


May the 4th, 2021

Yours Truly, somewhere in North America…


Well, the unthinkable has come to pass. We have now crossed a rubicon that no one thought we would ever cross as the price of a single barrel of oil has risen from the previously unthinkable $26 it hit in January of 2016 to the $300 it hit yesterday – an almost 1200% increase in just over five years. There is no sugar-coating it, this is a major problem that doesn’t appear to have a short term solution, certainly not for the consumer and ironically not for a lot of producers either (especially tight oil guys) as they still struggle to break even at these prices.


How did we get here?


The path we took to get here was circuitous but eminently preventable and has its roots in the last downturn. For those of you who don’t remember the 2014-2018 world, it was marked by crashing oil prices combined with a blind faith in renewable energy and anti-fossil fuel protests that combined to strip critical investment from the oi and gas industry. Consider that from the end of 2014 through 2017, investment in new oil and gas projects worldwide fell a staggering 44% or some $350 billion on a cumulative basis. All while decline rates of 5% and demand growth of 1-2% a year necessitated the addition of about 7 million barrels a day per year of production.


To meet this, the world relied on massive storage amounts and the false comfort of light tight oil becoming the swing producer and being the spare capacity needed to balance the market. The end result of this was that instead of new investment going into a broad basket of projects, the proverbial wheelbarrow full of money was rolled into West Texas. Production grew, but couldn’t stem the tide.


OPEC meanwhile, in concert with Russia, was doing its part to reduce the inventory overhang and boost prices for its own specific ends. This appeared to have solved the low price conundrum by mid 2018 and was thought to be at a Goldilocks level which might encourage new investment outside of the one basket all the eggs were in. Unfortunately, OPEC and Russia got greedy and the agreement was extended for another six months in what has now been revealed to be a plan to allow the oil price to move higher and maximize the value of the Saudi Aramco IPO.


By the end of 2018, oil prices had breached the $80 mark and were well on their way to at least $100.


Ironically, the same price and easy money related forces that led the land rush in the early 2010’s in Texas began to take root again as over the course of 2019 an extra 400 rigs were put to work in the Permian Basin and the Eagle Ford to take advantage of these higher prices. Unfortunately, with most of the sweet spots already drilled, many of these new rigs were trying to exploit a resource that unbeknownst to them had already peaked. This was evidenced by a gradual decline in initial production rates and steep decline rates.


Undeterred, companies sought to boost production by adding more horsepower for fracking and injected even more sand into longer and longer horizontal laterals resulting in rapidly increasing costs per marginal barrel, raising break-evens dramatically higher and requiring ever larger amounts of capital.


Production grew monthly, but the grind was intense. There was really no way companies could keep up the frantic pace.


By mid-2019 oil prices were at $150 and while all the experts said that they wouldn’t hold there and that the massive build in inventories would eventually stabilize pricing. Of course by this time, unbeknownst to the investing community, the massive increase in storage in Cushing was filled almost exclusively with light oil that refineries had stopped accepting.


On the consumer side, the price of gas was rocketing up and proving to be a major problem for the average consumer resulting in creeping demand destruction at just the wrong time.


Against this backdrop of increasing costs, diminishing returns and an over-supply of product not in demand, the sins of an over-heating economy started to show. Wage inflation spiked through 2019 and the federal deficit exploded as the triple-whammy of unfunded tax cuts, massive spending increases and an already at full employment economy crushed the US dollar and forced the Feds hand on interest rates to defend the dollar and try to slow inflation. What followed was a series of disastrous and large interest rate hikes that raised borrowing costs drastically but failed to stop the run on the US dollar.


By the end of 2019, oil prices were reaching the $200 range and business investment had ground to a halt in the United States. As layoffs mounted, the unemployment rate doubled. Natural gas prices were spiking as well resulting in super elevated electricity prices. Unable to get more than 10% of the power required via renewables, the US government was forced to nationalize the coal industry and restart dozens of mothballed coal power plants just to keep the lights on. It was not pretty for those of us who lived through it.


Internationally, the economies of China and India continued to heat up and demand for energy grew at a fairly frantic pace.


Two significant events occurred at the end of 2019 and early 2020 that served to exacerbate the ongoing troubles for the oil price.


The first was the Aramco IPO, which finally happened in December of 2019. While the choice of market being the Shanghai Exchange was troubling, it was the reserves disclosure in the public filings that set the market on edge as it revealed that notwithstanding the elevated oil price, Saudi reserves were in fact lower than anyone expected, underlining concern that oil supplies were in fact way tighter than anyone ever expected.


The second event was of course the outbreak of hostilities between Saudi Arabia and Iran in January of 2020, followed closely by the renewal of nuclear tests by North Korea, which sent the price of a barrel of oil to $250 by mid-2020.


As the market was coming apart at the seams, the political world was undergoing its own special form of turmoil and instability


With the economy in a tailspin and stagflation a real possibility, the Republican majority legislative branch finally turned on Donald Trump and impeached him just prior to the primaries, dusting off the Mueller Report of 2018, and Russian election meddling as rationale.  In a fit of pique, Donald Trump crossed the floor in one of the most bizarre episodes of political theatre seen in the United States since its founding.


Sensing that this might be the only chance they had of winning back the White House, the Democrats welcomed Trump with open arms and he was virtually acclaimed as their 2020 candidate. We all know what happened next as the Donald Trump/Chelsea Clinton blue wave crushed the Rubio/Ryan Republicans and took back the house as well on a promise to re-energize a shipwrecked economy that had been done in by the profligacy of the Republicans in prior years that had been led by the very same Donald Trump who now said only he could save it via what he called the “Newer and Betterer Deal”. One of the main New Deal projects that was launched in the first 100 days was the Great Canadian Wall.


Confused? The markets weren’t. Oil prices hit $275 on the day after the election and the stock market dropped by 7%.


With bankruptcies piling up, the new administration ordered the Federal Reserve to slash interest rates, feeding fuel to the inflationary beast that had already been unleashed in the US, further cratering the dollar and pushing oil prices back up.


Which leads us to yesterday and the stunning news that Tesla had fired Elon Musk for gross incompetence, even though he had finally delivered the 100,000th Model 3. The company then announced that it was finally out of other people’s money, declared itself out of the electric vehicle and battery business, declared bankruptcy and sold the whole bit to Apple for $1. This sent the price of oil to $300.07 a barrel, the highest ever.


Where do we go now?


Various initiatives are under way or have been proposed over the past year and a half to try and break the supply crisis. The first and most obvious is to double down in the light tight oil markets to stabilize the domestic market, at the very least to get gasoline prices back under control, but the mega refinery proposed for Midland is already behind schedule and over-budget.


The war that broke out in the Middle East and continues to rage unabated is not impacting production levels, but the now heavily mined Straits of Hormuz is making is virtually impossible to send shipments. The massive reactivation project for the TransArabian Pipeline from Saudi Arabia to Tel Aviv (new terminus) has been approved and is under construction and is expected once operational to be able to deliver close to 2 million barrels of oil per day to tankers destined for the United States.


After being denied a piece of the action in the Aramco IPO, Russia withdrew its support from the OPEC/NOPEC group and decided to go it alone on production. However, heavy sanctions imposed as a result of the Mueller Report and lost access to European markets have left the Russian industry in disarray with access to development capital virtually gone and production in terminal decline.


While there was hope that after its sovereign bankruptcy and subsequent purchase by China that Venezuela would be able to ramp up production fairly quickly and help alleviate the supply crunch that may not be feasible. Recent releases by the Chinese Venezuela government paint a fairly bleak picture of this former major OPEC producer, detailing the trillions of dollars likely required to repair and upgrade the country’s infrastructure, never mind clean up the environment after so many years of neglect.


Which brings us finally to Canada, where the largely undeveloped oilsands represent a compelling source of crude for the thirsty United States and indeed the world. At last count there are at least 10 projects proposed for development in the region and at various stages of the new Impact Assessment Agency process. It is expected that at least one of these projects – The First Nations Women’s SAGD project – will get fast-tracked approval by new Environment Minister Notley. It’s anyone’s guess when the approvals might happen.


To that end, newly re-elected Prime Minister Justin Trudeau is proposing to have the Trudeau Memorial Pipeline Company – the recently renamed Crown Corp that bought Kinder Morgan Canada in 2018 – take over the Keystone XL project as well as the Line 3 replacement so that these projects can actually be built and more oilsands product can come from Canada into the US. While this effectively nationalizes close to half of the Canadian mainline oil pipeline network, as Trudeau says at pretty much any press conference he attends – this pipeline will get built – even though the signature TransMountain Expansion remains mired in court challenges and NIMBYism.


For those who may have forgotten, Keystone XL, which was first proposed before oil was discovered in Alberta, is the on-again, off-again pipeline project that could actually help resolve many issues if only newly appointed EPA Secretary Obama would finally re-approve it. Clearly Mr. Trudeau is counting on his personal relationship with the former president to get the approval done. The Line 3 replacement has been in legal limbo since the government of Minnesota determined that having access to all that oil wasn’t economically necessary which seems ironic in light of where prices are at.




The world today looks quite a bit different than it did just a few short years ago. But the one constant is that the need for energy is never-ending. $300 oil is going to be with us for a while, but once everything calms down, we should be OK. Maybe. As long as we can get some pipelines built. And wells drilled.


So, $300 a barrel oil. A possibility. Albeit a very slim one. This future is just one of many possible futures. Except the Canadian one which is much more likely given our current inability to get out of our own way and simply get things done. But we can always hope, right? A new hope. And trust the force. It worked for Luke. At least for a while.


Prices as at May 4, 2018 (April 27, 2018)

  • The price of oil held steady during the week before rising at the end as Iran sanction excitement ramped up
    • Storage posted an increase
    • Production was up marginally
    • The rig count in the US was mixed
  • After a larger than expected injection, natural gas gave up some ground…


  • WTI Crude: $69.72 ($68.10)
  • Nymex Gas: $2.711 ($2.771)
  • US/Canadian Dollar: $0.7780 ($ 0.7800)


  • As at April 27, 2018, US crude oil supplies were at 436.0 million barrels, a increase of 6.2 million barrels from the previous week and 91.8 million barrels below last year.
    • The number of days oil supply in storage was 26.0 behind last year’s 31.0.
    • Production was up for the week by 33,000 barrels a day at 10.619 million barrels per day. Production last year at the same time was 9.283 million barrels per day. The change in production this week came from a increase in Alaska deliveries and a increase in Lower 48 production.
    • Imports rose from 8.469 million barrels a day to 8.539 compared to 8.264 million barrels per day last year.
    • Exports from the US fell to 2.148 million barrels a day from 2.331 last week and 0.538 a year ago
    • Canadian exports to the US were 3.725 million barrels a day, up from 3.238
    • Refinery inputs were up during the week at 16.778 million barrels a day
  • As at April 20, 2018, US natural gas in storage was 1.343 billion cubic feet (Bcf), which is 28% lower than the 5-year average and about 40% less than last year’s level, following an implied net injection of 62 Bcf during the report week
    • Overall U.S. natural gas consumption was down 9% during the report week
    • Production for the week was up 1%. Imports from Canada were up 2% compared to the week before. Exports to Mexico were up 2%.
    • LNG exports totalled 17.8 Bcf.
  • Can you say “Break-up”? As of April 23 the Canadian rig count was 77 – 72 Alberta, 2 BC, 3 Saskatchewan, 0 Manitoba and 0 elsewhere. Rig count for the same period last year was actually higher.
  • US Onshore Oil rig count at May 4, 2018 was at 834, up 9 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States was up 1 at 196.
    • Peak rig count before the downturn was November 11, 2014 at 356 (note the actual peak gas rig count was 1,606 on August 29, 2008)
  • Offshore rig count was up 1 at 19
    • Offshore rig count at January 1, 2015 was 55
  • US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 70%/30%



  • Petronas announced it had purchased a stake in LNG Canada, the Shell led consortium seeking to build an LNG project in Canada’s least fossil fuel friendly jurisdiction. I am guessing they know something we don’t
  • The price of gas in Vancouver, at more than $1.60 a litre has officially become the most expensive gas price ever recorded in North America. As an energy independent country with arguably the highest reserves in the world, this is a singular accomplishment
  • The Keystone pipeline was allowed to operate at full capacity for the first time since it had a spill in late 2017. The increased barrels will help to alleviate the discount Canadian oil receives
  • In a related development, TransCanada announced that it was starting preliminary ground-clearing work in Montana related to its Keystone XL pipeline. An FID on this project is expected in the fall.
  • To be discussed at a later date, but oil and gas producers are posting some of the best results for Q1 that they have posted in the last several years. Except Cenovus, which I picked as an outperform.
  • Trump Watch: Giuliani. Crazy eyes. Wow.
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